Writing about major acquisitions is among the best topics to cover. They provide a great opportunity to research companies in order to better understand the factors behind the sale. One such sale was Intermix, a company snatched up by Rupert Murdoch’s News Corp. less than two weeks ago. Unlike many of the recent sales, including several in the hundred million dollar range, Intermix stands alone in their having already been a public company prior to the sale. As such, much more existed regarding their financial, and other business activities, than tends to exist with private companies.

Most public companies disclose only the requisite financial information, leaving the rest of us to infer the behind the scene’s drivers. This certainly applies for this week’s batch of earnings announcements from search giants Google and Yahoo and ecommerce powerhouses Amazon and eBay. In this week’s Trends Report, we cram four articles worth of earnings report into one action packed review of these billion dollar companies’ second quarter performances. At an average of $1.3 billion dollars in revenue for the quarter, a little simple math shows these companies earn on average more than $400 million per month or $10 million dollars per day in revenue.

The first of our billion dollar businesses is Amazon, whose revenues rose from $1.39 billion to $1.75 compared to their second quarter one year ago. While this increase roughly equals the amount of revenue generated from their 1.5 million advance order purchases of the most recent Harry Potter’s book, analysts chose to highlight Amazon’s increased gross profit. Amazon calculates gross profit as revenue minus their cost to buy products, and that number increased 32% to $450 million, up from $341 million. The company’s overall net profit dipped lower than the same quarter last year, $52 million as opposed to the previous $76 million, but that difference can be attributed to a non-recurring tax expense. Were the expense not there, net profit would have grown by almost 50%. Amazon’s CFO attributed the lift in profit to increased sales through their independent merchant channel which offers other sellers the ability to get listed on Amazon and leverage their traffic strength. It is no doubt to be a continued focus as Amazon still earns a percent of each sale but avoids their biggest cost, shipping.

Not to be outdone by the almost ironic book-company-named-after-a-forest, eBay, beloved since its 1998 IPO, also impressed those on Wall Street with its recent earnings report. The company had taken a little heat not too long ago after many wondered whether it could sustain its impressive and rising earnings. At $292 million dollars, eBay pulled in $100 million more in profit than it did for the same time period last year. Their revenues too, also increased, up 40% to $1.09 billion. Similar to Amazon, they too raised their full year outlook, in this case predicting revenues of $4.4 billion. Almost as important, these results help counter a series of bad news during the first quarter including disappointing earnings, announcements of fee hikes, and significant noise from buyers and sellers regarding fraud. Wall Street and eBay’s competitors alike will be watching the company carefully to see whether this quarter’s positive results came from the increased fees or as indicated by eBay growth in its buyer and seller base.

Sometimes growing revenues and meeting earnings targets isn’t enough. That was the case with Yahoo, which saw a few hundred million dollars in market capitalization disappear after their recent earnings announcement. The company that is in a “constant state of invention” according to its CEO Terry Semel saw US revenues reach $870 million and international revenues top $383 million. Those represent a 39% and an 84% gain respectively. Despite the solid increase in branding advertisers and their impressive international expansion, analysts and investors only want to know how Yahoo compares to Google in search. Yahoo has 30% of the search query market, and has not closed the gap recently compared to Google’s 37%. Additionally, Yahoo does not earn as much per search as Google despite having a higher average CPC, a sign that Google’s performance pricing strategy does produce better returns. To keep pace Yahoo is hard at work on unveiling a revised platform that will most likely take click through performance into consideration. Yahoo was also dinged for their steep rise in traffic costs, which put a stain on their sharp rise in revenues. Don’t count them out though. The company still expects to earn around $3.7 billion in revenues and more than $1 billion in profits this year.

Far from first to market but number one in almost every other respect, Google now dominates Internet media. Unlike Amazon and eBay whose shares rose after their earnings announcement, Google shared Yahoo’s fate, seeing their stock price fall. With its shares having more than tripled since its IPO not too long ago, anything less than mind numbingly insane would not have appeased the investors. Qualifying as still mind numbing but perhaps not insane, Google saw earnings quadruple compared to the same period the year before. In 2004, the company earned just over $79 million in profit. This year, that number topped $342 million, which, to put into perspective, tops all other companies listed here. Revenues too soared, climbing more than $600 million to $1.38 billion – second only to e-tailer Amazon. Yet, investors expected more, and coupled with the announcement that third-quarter growth might not equal the already below expectation 10% growth Google saw from Q1 to Q2, their shares took a beating. Internet traffic in general slows down during the second quarter, and sustaining 15% to 28% quarter over quarter growth comes less easily, especially when earning more than a billion dollars quarterly.

Despite the net-net decrease in market capitalization after their collective earnings announcements, the fab-four profiled here had nothing short of fantastic results. Best of all, the results, like the companies themselves are real. While they conduct their business online, their results aren’t. Take for example the fact that more than 724,000 Americans report that eBay is their primary or secondary source of income, with another 1.5 million saying they supplement their income by selling on eBay. While Amazon doesn’t publish those figures, in its earnings statements it revealed that 28% of its revenues came from independent merchants. Without Google and Yahoo, tens of thousands of small businesses would not be online – both spending and receiving money. And let’s not forget eBay and Amazon’s prevalent spending on these two engines. True, three out of the four may have funny names, and those in the future may not, but these are the first generation of online to offline companies, and luckily, they won’t be the last.

Rupert Murdoch is here, and his entry is a sign of more purchases to come. No such event happened in time for this week’s publication, a fact that remedies itself, though, next week with coverage of Experian’s purchase of ClassesUSA. This week’s article is one of those that has been on my mind for some time but twice has been withheld from publication. The reason, I believe, has to do with the nature of our business. Those in our space operate nimble businesses; ones focused more on the speed of execution as opposed to the design of the internal processes behind the results. As such, we focus more on business models than organizational charts; we measure success by the speed of the boat, and we do not tend to deduct points for the size of the wake. That said, there is a definite, yet often hard to quantify, value on the operational side of the business, a type of thinking that most likely drives men such as Mr. Murdoch.

What do we want out of our fellow employees and ourselves? We want sound decisions and to lead effectively. Aside from twenty years running large companies or working directly for Warren Buffet, sound business advice often remains elusive. Most of us do not have the time required to accumulate that tried and true knowledge. Lucky for us, Bill Swanson of Raytheon has taken his twenty plus years and shared his combined learnings in a recent issue of Business 2.0. “The CEO’s Secret Handbook” more commonly known as Swanson’s Unwritten Rules of Management, has attracted not just fans from other top companies but also the approval of Warren Buffet. Given its cult status in the business world that rivals the White album, we felt it a worthy run down. It won’t tell the secret to the $2.00 zip or to picking out keywords on Google, but it might just help in your next negotiation or brainstorming exercise, both of which could equal if not add even more strategic value.

For those expecting magical sayings to rival the spells found in Harry Potter, be ready for disappointment. Swanson doesn’t espouse anything brand new. What he does offer is advice from one who runs a multi-billion dollar company, something that in many ways translates into a Cliff’s Notes of the most impactful sayings. Our own rundown of which begins with the rule, “You can’t polish a sneaker.” I’ve never polished a sneaker, but no amount of polish will have it looking like a dress shoe. The same goes for a bad idea or one that doesn’t have substance. Don’t waste time dressing it up. Every idea deserves a review but not every idea deserves development.

Five years ago when I was at Advertising.com, I remember a speech given by CEO Scott Ferber. Listening to Scott is like listening to Mozart playing Mozart – seeing the ingénue in action. In this particular speech he sounded as though he had not just read the handbook but written it. His speech highlighted another one of its principles: Anyone can find problems. Want to do something unexpected? “Look for what is missing.” That’s how Bill Swanson phrases it. In other words, “Many know how to improve what is there; few can see what isn’t there.” Like the Underground in London – mind the gap. When you’re tempted to simply correct or modify another’s work, take it to the next level and see if you can find what will make a circle a sphere.

Few would argue that the people are as important as the companies they work for and that good companies come from good people. Many often think of companies, especially those like Raytheon in the defense industry as heartless. They would expect rules telling us that a bottle rocket can’t be turned into a SCUD, or that too many people take the easy road with respect to product improvement and development. They probably wouldn’t expect the next rule, one I personally like the most. It says, “A person who is nice to you but rude to the waiter – or to others – is not a nice person. (This rule never fails.)” If you want to understand another’s character, watch him as he interacts with other people, especially those he does not have to impress. Good leaders and good team members need a level of consistency in all areas of life. These are people that we should be able to look up to and within whom we trust, often crucial, aspects of our business. Thus, while the world of business is often cutthroat, those in it do not have to be backstabbers. Other of Bill Swanson’s Unwritten Rules include:

· When faced with decisions, try to look at them as if you were one level up in the organization, and
· You remember only a 1/3 what you read and 1/3 of what people tell you but 100 percent of what you feel.

Unlike business model analysis and key lever discovery, it doesn’t take any special insight to copy, paste, and rephrase the rules, only the effort to uncover them. We’d rather focus on actions. We get paid on actions - at the office as part of our salary and at work from our advertisers. While helpful to hear from one who runs a billion dollar business, the real secret CEO handbook would be from one that has built billion dollar businesses. We all want to get the most out of others, and ourselves but what we really want is to keep doing better than the best others and we expected. Our industry handbook, were there one, would tell of focus and drive, of passion, intensity, and making the road less traveled the better route.

During eUniverse’s ultimately turbulent fiscal year 2003, they acquired direct marketing focused Response Base, a company run by Chris DeWolfe, who along with the other co-founder of MySpace.com, Tom Anderson, had also worked at XDrive.com. After selling Response Base to eUniverse, Chris and Tom took an undisclosed investment from eUniverse to get MySpace off the ground. eUniverse received 66% of the newly formed company and provided office space and other assistance to the burgeoning unit. The pair bought the myspace.com domain from a defunct online data-storage company with plans to turn it into "a portal around a person's social life."

In their quest to create a better social networking site, the team at MySpace focused on the obvious deficiencies of then reigning champ, Friendster, and that was speed. Users constantly complained about their ability to access the site, and with some help from well-connected employees along with Intermix’s media muscle, it didn’t take long for frustrated Friendster users to discover and ultimately switch to MySpace. The site really took off when in 2004 they fulfilled one of their initial desires – creating a site that catered to amateur musicians. Bands had already created profiles on the site, but now they had the ability to upload songs and offer streaming music to fans. That, along with constant feature upgrades focused on user expression propelled MySpace to the top ranks of the web. Today, Myspace has more page views than Google; its 22 million-member base currently increases by 75,000 new users per day, all with no cost of acquisition.

As reported in the LA Times, more than 350,000 of their key profile lever, bands and solo artists, from the unknown to the famous, have set up pages to let people sample and share songs, exchange e-mail with the bands and see tour dates. The site has had such success in this arena that it now has more people coming to it for music than MTV Online. And, in a sign of the profound impact that MySpace has had on the music industry, in September of 2004 R.E.M. became the first band from a major record label to stream a whole album on MySpace before its official release. Several bands followed suit, including the Black Eyed Peas, and three other Interscope artists –Queens of the Stone Age, Nine Inch Nails and Audioslave. Weezer and Billy Corrigan from Smashing Pumpkins fame also used the platform to share their work prior to its release. Says Billy Corogan, "Now that MySpace is here, bands don't necessarily need a label to be heard."

For Rupert Murdoch, founder and head of News Corp. as well as a self-proclaimed “digital immigrant,” MySpace offers exactly what his company needs in order to combat the decline of traditional content delivery. Consumers between the ages of 13 and 34 are increasingly using the web as their medium of choice for all types of information, hitting at the heart of News Corp.’s core businesses. As Rupert Murdoch said in a speech prior to the acquisition, "The threat of losing print advertising dollars to online media is very real. In fact, it's already happening, particularly in classifieds." Owning one of the biggest communities online should help, and it could even mean a competitor to the now famous Craigslist. Additionally, by acquiring MySpace and promising to keep the platform open for other companies to continue to distribute media, News Corp. now has the ultimate market research tool; they can see what users want and adapt quicker than most to changing tastes. That MySpace has massive reach and already successful distribution for music only helps, and suggests that MySpace could soon find itself changing the way other content, such as movies, gets delivered.

Given that MySpace was the main attraction, many wonder why News Corp. paid $580 million for an asset that on paper was worth closer to $125 million. The answer to that comes by looking at Intermix’s public filings. The company started with a 66% stake in MySpace, but in February of 2005, Intermix and MySpace took in funding from Redpoint Ventures. The investment company paid $11.5 million for 25% of the networking site, their shares coming from both Intermix and MySpace’s existing shareholders. Of the $11.5 million, $4.3 went to Intermix, the original shareholders of MySpace received $3.75 million to take money off the table, with the remaining $5 million being put into the new MySpace, Inc. Post investment, Intermix retained 53% but more importantly, they managed to have written into the agreement a special clause giving them an option to buy out the other stockholders of MySpace based on a valuation of $125.0 million if the Company receives “a bona fide offer by a third party to acquire more than 50% of the stock or assets of Intermix within 12 months of the closing date.” Given that the investment closed in February, we are well within that 12-month period.

Those at Intermix weren’t the only ones who profited from the sale. The deal was particularly kind to the investment community as well. Redpoint Ventures who invested once in eUniverse and in the aforementioned MySpace deal above stands to make $60+ million from an investment of around $15 million. The other significant investor, VantagePoint Partners did almost as well, earning $44 million on a $14 million total investment. Theirs involved a straightforward purchase of $8M in Series C stock and a complex and clever negotiation with the Sony digital investment group, giving VantagePoint at a discounted price, the equity from the $17 million Sony invested in 2001.

Why did MySpace succeed, especially in an area where many have entered, including Internet juggernaut Google? As Business Week suggests, “the answer is, partly, a matter of geography. It emerged from the L.A. music and club scene, drawing on Anderson and DeWolfe's friends for early support. It wasn't concocted by Silicon Valley tech types or New York bankers. It was born in a city that's geared toward media and entertainment, not technology or finance. And like other great exports from Southern California -- such as Hollywood and surfboards -- MySpace tapped into the country's psyche.”

Business Week elaborates on MySpace’s success by saying that where other sites tried to be “useful, sensible, and safe,” MySpace focused on being exciting and fun. They attracted lots of models and musicians, people who naturally attract a following in addition to one’s circle of friends. MySpace also leveraged technology to the fullest, implementing features, such as blogs, before many rivals did. Their key to technology development, though, has been to insure that it focuses on the main appeal of the site –allowing users to easily customize their own pages so that they can let their personalities “shine through.” A user of MySpace explains by saying that the site did an exceptional job at creating an environment that the average American youth wants to become a part of. Not only does it encourage individualism, but it also offers the ability to group with similarly minded peers. As a sign of the site’s cultural impact, look no further than one user’s experience of being asked at bars "Can I add you to my friends list on MySpace?" compared to the traditional "Can I get your phone number?"

Few could have predicted the success of MySpace, and even fewer would have imagined it selling for more than About.com did. The acquisition shows that Murdoch, while a digital immigrant, has a company that understands if not the potential for the net, its power and the continued role it will play for the distribution of news and entertainment. It also gives MySpace a fighting chance against Yahoo and MSN, both of whom have taken accelerated steps into the social network space. Finally, this deal shows us that perhaps those who said content is king when it came to valuation, should revise their comments. A platform for user-generated content that can attract and retain users and help an offline media company realize the potential online is king. Many in our space make more than $70 million in annual revenues and $5 million in profit, but even the best hasn’t sold for close to what Intermix/Myspace did. Something for us to think about.

Less than a week after announcing that it had settled its spyware related trespassing lawsuit with Elliot Spitzer, Intermix Media again made headlines. This time, though, the headlines involved Intermix gaining a substantial amount of money as opposed to having to pay it. In what can be called another case of a traditional media company snapping up an Internet player, or even one company’s attempt to build a new Internet empire, the recent sale of Intermix to News Corp for roughly $580 million dollars should certainly be called amazing. And, while Intermix Media reaches tens of millions of users per month, most people believe the sale revolved around Intermix’s majority stake in social networking site MySpace.com. In this week’s Digital Thoughts, we look at a tale of two companies, in a special two part issue. In Part 1, we look at the incredible story of Intermix, while in Part 2 we cover the current phenomenon, MySpace.

The story of Intermix is one worthy of its close to Hollywood location, a fascinating story both financially and operationally. Founded in April 1999 by UCLA buddies Brad Greenspan and Brett Brewer, they raised $7 million to buy the music retailer CD Universe, and then went public by "reverse merging" into the shell of a defunct company. Being a music etailer did not last long. Selling CDs online makes little profit and leaves no ability for easy growth. Thus, about a year after they purchased CD Universe, the two sold it back to the original owner. What they kept were the network of sites they purchased to drive traffic to CD Universe. This network of approximately 300 sites formed the foundation for Entertainment Universe, aka eUniverse.

Brad Greenspan summarized the early eUniverse business model during an October 2001 interview with TheStreet.com by saying, “The business plan from day one wasn't to be a CD retailer, it was to get public and get access to currency and use it to acquire content and community sites. We felt if we could acquire the right one's, large, loyal audience, we would figure out high-margin items to sell to that audience. We started incubating what's now the eUniverse network on the side as we were running the CD Universe business and finally got it to a level where it was generating advertising revenue and direct marketing revenue.” To that end, eUniverse succeeded, although it took them almost two years to have their first profitable quarter.

Like many, eUniverse lost money during the dot-com boom but had refined their business model enough, thanks in part to an emphasis on direct marketing advertisers they succeeded during the dot-com collapse. Before turning things around, they certainly struggled. The company lost $17 million on $4 million dollars for their fiscal year that ended in March 2001. Earlier, in January of that same year, they survived a failed attempted acquisition of L90, a company that saw two of its executive suddenly depart along with an SEC investigation into one of them. eUniverse’s fortunes turned a corner in July 2001 as they took in $17 million from an online investment branch of Sony. Interestingly, the deal required they spend $9 million of it though to purchase newsletter publisher Infobeat from the same investment group.

After breaking even for the first time in Q3 of the 2001 calendar year and then again in Q4, eUniverse went from a company doing $4 million in revenues annually to one that earned $33 million in revenues in 2002 with $5.7 million in profit. In the following year, 2003, they saw revenues jump to $65.7 million. All was not rosy in the empire, though, a glint in the armor showing as revenues declined 13% to $57.3 million for their fiscal year 2004. In October of 2003, Brad Greenspan, who at the time was the co-founder, largest shareholder, CEO and Chairman was replaced as CEO. He held on to a board seat until mid December, when he resigned from that position as well, albeit with reservations. His feelings of ill-will towards where the new management was taking the company played itself out in a nasty public battle in which Greenspan urged shareholders to take an alternate direction from that desired by the company’s board.

In its defense, the board of directors sent out letters to shareholders detailing the history of the company under Greenspan’s tenure. In their letters, the board noted that under Greenspan, the company discovered the need to restate the first three quarters’ earnings of their fiscal year 2003. eUniverse also became the subject of an informal inquiry by the U.S. Securities and Exchange Commission. And, as a result of the restatement, they had their stock halted from trading, a stop that lasted for almost four months and ultimately lead to their being delisted from NASDAQ. Stockholders sued the company in various class action and derivative lawsuits, all of which directly related to the company needing to raise additional capital to survive. Best of all for bystanders, all of the drama unfolded through publicly available filings, documents that normally put an average person to sleep.

Up until this point, the story of eUniverse, which did receive its necessary funding to stay afloat and who became Intermix in July of 2004, does not sound like a tale of a company that would sell for more money than About.com, Advertising.com, LowerMyBills.com, Interactive Search Holding, Webclients, and even what Microsoft was offering for Claira. While mildly profitable, nothing suggests a valuation greater than content site Neopets who has a similar user base in size but sold for less than a third of the price at $160 million. The answer to the valuation comes with the second part of today’s Digital Thoughts, the rise of MySpace.

The first half of the newsletter version of “A Crash Course in the Vendor Landscape” covered the display ad network space and three areas that overlapped with it – ad serving, contextual / behavioral ad providers, and adware. We also covered ad rep firms and a subset of ad serving, the rich media ad servers. In Part 2 of this week’s Digital Thoughts, running in place of this week’s Trends Report, we look at two other areas that overlap with display ad networks and the four segments that overlap with them. These six segments comprise the most relevant segments to our industry, direct marketing online, and include – content networks, affiliate marketing, co-registration, email, lead generation, and incentive promotion companies. The Venn diagram contained within the actual presentation will help paint a visual picture of the company and category segmentation and can be downloaded here (5 MB).

Content networks, an ad network overlap and the first segment we cover here, appear at first glance the least relevant to those operating in the direct response world. Unlike Yahoo, CNN, or ESPN, content networks consist of some Tier 1 but many Tier 2 sites, especially with respect to brand. Among the best examples is Intermix. While known now for their run in with Spitzer, they initially gained a following off of their sticky fun-page sites. As opposed to the other segments such as lead generation, much of the traffic for content sites comes from repeat users and their viral referrals. Intermix also owns 55% of the web’s 5th largest property in terms of page views and arguable the most buzz-worthy, MySpace. What makes content networks of interest is that, given their high repeat user base and often non-branded sites, they have a substantial amount of remnant inventory much of which direct response advertisers fill.

One thing the sticky sites of content networks help generate are large email lists. Email provides a great format for these sites to deliver additional content or the same content broken up into single servings. Other segments that we cover also generate a high volume of email addresses. These include the upcoming lead generation and incentive promotion segments. With email deliverability at seemingly all time lows and the nuances that go into being both legally compliant and white listed, many of the companies that once managed their own email lists now turn to third parties. Companies that specialize in email hosting have existed for quite some time, but Datran Media helped invent an entirely new form, the outsourced email hosting and monetization service. Their strength in delivery, targeting, and ad sales allows them to earn many types of list owners more than managing their monetization in-house.

Before email as channel and before lead generation, co-reg, and incentive promotion commanded their own segment, even before display ad networks took off, many advertisers and publishers turned to affiliate networks for their internet advertising needs. Affiliate networks enabled merchants to have an outside sales force promoting their product and service, the affiliate. And companies such as Commission Junction helped many such merchants become affiliate-enabled not to mention providing a means by which merchants could, without programming, accept or deny affiliates, see stats, and make one payment with the network handling the individual payouts. What affiliate networks didn’t do, though, was provide guaranteed access to traffic, and many had set up fees along with monthly minimums. That opened the door for the display ad networks and to our final categories - lead generation, co-registration, and incentive promotion.

Direct response marketers realized quickly the potential that Internet advertising offered them, unfortunately, finding inventory that worked for them generally proved difficult especially in the early years of internet advertising when inventory was scarce and prices inflated. In 2001 a few individual advertisers and several ad networks, primarily those focusing on email found success with lead generation offers. During the next several years, the best of these companies, Azoogle, Ateractive, and Quinstreet began thinking outside of email and becoming what we now refer to as the arbitragers, media agnostic buyers and sellers of internet traffic. They were paid on a CPA basis and would buy media on any price structure so long as it converted. These companies created vertically focused pages that captured user data and was then sold off to participating buyers. The buyers focused on closing the leads while the marketers focused on traffic and conversion.

In their search of internet traffic opportunities, one area that the arbitrageurs, especially Azoogle and Adteractive found room for growth was in the incentive promotion and co-reg spaces. Companies such as Colonize helped invent and popularize co-registration and registration paths, but it wasn’t until this user flow method merged with the incentive model that both really picked up steam. The incentive space began with Netflip who offered internet surfers the opportunity to earn cash for participating in specific offers. They also offered other websites the opportunity to private label the technology. One company that saw the potential with the incentive space was YF Direct, now Netblue. They made it big with their YourFreeDVDs.com offer where users could earn movie titles of their choice. It was AdDrive that took the incentive offer to the next level by using a higher value premium than had typically been done and inserting a co-registration path. TheUseful.com, as they typically do, followed suit and went full bore with the incentive promotion offer, becoming a top five advertiser in many ad networks.

Companies like TheUseful and Netblue also fall into the category of arbitrageurs as they make their money by taking a user and having them convert on other Internet offers. They rely on the returns being greater than the cost of the media or in the case of affiliate deals, the cost of the email address to acquire them. The incentive area became so specialized that companies couldn’t often focus on all four areas – the promotion, the traffic, the registration, and the incentive fulfillment. As a result many outsourced portions of it such as the co-registration flow and media agnostic companies like Azoogle and Adteractive were there to help, offering solutions for the most complex – the co-registration path and incentive back-end. Datran Media, mentioned above would often come in to help with the collected emails.

In the end, understanding the vendor landscape is really about mapping the current state of Internet traffic as that dictates how the companies that monetize it operate. By looking at the segments and their evolution, we see how the overlap came to be, and by understanding the skill sets required for success in each we can start to wrap our heads around why it is, that certain companies operate in the segments they do. We can also understand why some companies might have difficulty starting in a new segment or competing as the segments evolve. Additionally, we can start to understand the often confusing relationships between companies who are both the advertiser and the publisher for another company. While we have only scratched the surface, we will continue to update the landscape and continue our effort to explain it, one column at a time.

This past Monday, Cliff Kurtzman, from Online-Ads, and I gave a presentation during Ad:Tech Chicago 2005 called, “A Crash Course on the Digital Marketing Vendor Landscape,” a talk that tried to untangle what some of those even in our space might see as a jumbled lump of companies and categories. Many seasoned Internet marketers do not know the difference between Adteractive and AzoogleAds or CoverClicks and LeadClick. In years past, such marketers would not care to learn the difference, but the scale that some of the companies in our space have reached along with the substantial investment activity, has started to break down the walls between our space and theirs.

The traditional model for viewing Internet companies, namely as being in either search or media, or being either an advertiser or publisher, do not allow the subtleties and interdependencies of the companies to show. This necessitated a different methodology and provided the starting point for our discussion and research. Since most people are familiar with sites such as Yahoo, Google, ESPN.com and American Greetings, those were not covered. Those non-agencies that helped place ads on such properties were included. The end goal was for those in the audience to come away with a better understanding of what certain companies do, how they differ from each other, where they fit in the ecosystem, and how the pieces of the ecosystem tie together.

A big thanks goes to the companies that chose to participate in the survey, many of whom chose to disclose employee count and even the range of earnings. What the survey data shows is just how large some of the almost-under the radar companies are. Quite a few have earnings greater than one of the better-known Internet companies Nielsen/NetRatings and several earn more than Internet enabler Akamai. Of the areas covered, one of the most mature and the one we chose to start with first is the display ad network. Banner ads, and the companies that serve them, have been around almost a decade. Besides being arguably the largest segment, it is also among the most advanced, most competitive, and commoditized.

In the display ad network space sit such companies as Advertising.com, Traffic Marketplace, Fastclick, and Tribal Fusion. The differentiating factors among the display ad network space tend to be their a) level of transparency – are they a blind network or site representation firm, b) targeting options for advertisers – do they allow for channel, category, behavioral, contextual targeting, c) how they sell ads – CPM, CPC, or CPA, d) how they buy ads – CPM, CPC, CPA, e) company focus – do they have other units / business interests outside of the display ad network space, f) the quality of their inventory, g) amount of inventory, and h) bells and whistles for publishers and advertisers. For example, a few in the space specialize in buying inventory on a CPM but selling access to that inventory on a CPA basis. Others might offer very user-friendly self-service interfaces.

On one side of the display ad network market sits one of the other segments covered, the ad serving companies. All display ad networks have an ad-serving component at their core. DoubleClick, among the most well known ad serving companies also used to run a display ad network but several years ago decided to only focus on the technology. Advertisers, agencies that manage multiple advertisers, and larger publishers all tend to license an ad serving solution so that they can determine what ads to show and track the results. In an effort to promote increasing ad variety, two companies started to focus on a subset of ad serving - rich media. Eyeblaster and PointRoll are two that, as opposed to current well-known ad serving companies such as Fastclick, DoubleClick, and Zedo, focus only on rich media advertisements and formats that exist outside of the standard ad units. These companies sell their solutions to the same agency and advertiser audience and make sure that their specialty ads can be integrated into the popular ad servers.

Display ad networks, ad servers, and rich media ad serving companies all tend to specialize in graphical ads. Led by Google, a new crop of companies has formed that focus not on graphical ads but on text. The combination of a large, pre-existing advertiser base along with technology that scans content pages, distilling them into a set of keywords, allowed Google to grow its ad revenues by tapping into to a wider set of users – those not on Google.com or direct search partner distributors. And, with the introduction and adoption of Google’s AdSense, the lines between search and media started to blur. Others have joined in filling in areas that Google doesn’t cover such as: solutions that allow sites to create their own mini-contextual network or even behavioral network. These include companies like Quigo and Tacoda. And in a case of reverse growth, again led by Google, these companies will start to venture into the graphical display ad market.

Another market segment that overlaps with display ad networks is adware. Both ad networks and adware tend to show ads as a result of a visitor going to a site, but in adware’s case, the site owner does not get compensated for the ads, the adware maker keeps all that revenue. Ad networks focus on the aggregation of site inventory whereas adware focuses on an install base. Both adware and ad networks though try to solve a similar problem – what ad to show a particular visitor. Having access to more data, adware companies can often target more granularly than the typical ad network. Several adware companies though are moving out of the traditional adware market and into the display ad market. Claria and Direct Revenue for instance continue to purchase display ad inventory, but rather than show with the hopes of gaining more installs, they are using that space to show their advertisers’ ads. Much like Google did with AdSense, Claria’s BehaviorLink Network looks to expand the inventory where its advertisers’ ads can show. And more importantly, they look to do so in a manner less contentious but just as effective.

Unlike the other segments described above, the final segment for this portion of Digital Thoughts does not directly overlap with display ad networks, but it does interact with it. This final group, ad rep firms, acts as an outside sales force for much of the inventory described above. In many cases, ad rep firms can be thought of as brokers, but typically, they differentiate themselves from brokers by forming a closer relationship with the companies whose inventory they resell. They tend to do more customer service and specialize in certain ad / inventory combinations. Adware helped create a mini-industry of ad rep firms, as the software makers often didn’t have the expertise or desire to focus on both software development and ad sales.

Many of the segments covered next have companies that create ads that run on the inventory and technology above. Click here for the entire presentation (5 MB) and see Digital Thoughts Part 2 for the remainder of the write-up.

This year, one topic in our industry has arguably drawn more attention than almost any other. From its effectiveness for advertisers, to its ability to frustrate consumers, as well as its almost disproportionate influence on the yearly internet advertising ecosystem, adware stands, for better or worse, in a league of its own. Whether it will help advance the medium or be merely a blotch on the history of internet advertising remains to be seen; among the most important points though is that adware might still have a future. In what WhenU describes as a “landmark internet decision,” the Second Circuit Court of Appeals ruled that the targeting methods employed by the adware maker do not constitute trademark infringement and as a result overturned an earlier precedent setting decision against in many ways not just WhenU but adware in general.

The recently overturned case stems from a 2003 suit filed by 1-800 Contacts that charged WhenU of allowing a rival to the lens maker, Vision Direct, of being able to purchase pop-up traffic when users went to the 1-800 Contacts site. In early 2004, a New York court ruled against WhenU and forbid the software company from showing ads on 1-800 Contacts web pages. Such a decision if enforced across the board stood the potential to cripple not just WhenU but any similar company. The Appeals Court ruled that WhenU did not allow advertisers to directly purchase traffic based specific URL’s and/or trademarks paving the way for more heated discussions by advertisers in the future.

Like Claria, WhenU has invested considerable effort as of late hard to shed its once nefarious image. WhenU looks to join Claria in attempting to be seen as a company that defines what a responsible adware company should be. This includes clear disclosure to the users on install, easy uninstall, notification of origin on each ad, and in WhenU’s case a toll free number included on every ad in case of user complaints. They must be doing something right, because despite all of the turmoil, WhenU and others have the attention of investors and potential purchasers. Not only has Microsoft expressed an interest in acquiring Claria (see Trends Report for more), but WhenU recently announced that it completed a $35 million fundraising round made up of a recent $15 million investment by Trident Capital and $20M in funding secured earlier this year from ABS Capital Partners. Such dollar amounts might be less than the multiple 100+ million deals in our space thus far this year, but for investment firms to allocate that level of funds is substantial. Institutional investors fall on the more conservative side. The money they invest belongs to somebody else, and the last thing they need is to have their current and/or future sources of capital jeopardized.

While the legal victory for WhenU undoubtedly sent a collective sigh of relief through the adware industry, this decision doesn’t resolve the issues at the heart of the adware debate. Whether WhenU or others directly target domains and trademarks will not diminish or prevent a competitor’s ad from showing while the user is surfing the companies site. In the case of traditional adware, that ad comes via a pop-up. Even in the newer models, such as Claria’s BehaviorLink, where ads no longer disrupt the user experience, competitors could still buy each others’ traffic.

Most in our industry fall on the buy side and have not had to consider the impact of having your rival potentially show up on top of your site, and for good reason. Most in our space focus only on performance. We care about brand but see it as a by-product of good performance, i.e. our brand is good because it performs, as opposed to the traditional mindset of if we build a good brand it will help performance. The difference while seemingly slight becomes a chasm when manifested in the marketing world. The branding dollars have only their brand on which to rely, something that by its nature does not lend itself to being easily quantified. They are intangible assets, giving meaning by someone other than the customer. That runs counter to the web where meaning comes from the collective actions of the users. With the web, users can provide instantaneous feedback and define what a brand is rather than that brand being forced on them. Brand is still important and powerful, but the offline techniques and assumptions regarding brands conflict with the dynamic, transparent, and fluid nature of the web.

The playing must be fair, though. Having competitive ads cover the entire window on top of the site they originally entered is not fair. Not aiding the users in finding what they want is not fair and should not be tolerated. Outside of that, let the users decide. Otherwise, the potential of the web diminishes as we are forced to operate in a restrictive and less efficient construct. In other words, if companies want to bid on their competitors’ trademarks in Google, so long as Google provides every means for the trademarked site to be number one in organic search, so be it. Just because a user is searching for Kleenex doesn’t mean they want to buy Kleenex. Offering users other choices benefits us all. But, as we’ve seen with the entertainment industry, the dinosaur companies would rather spend more effort fighting to maintain the status quo rather than trying to benefit from the new.

When both the New York Times and the Wall Street Journal choose to a cover a topic, chances are it is a press worthy story. On the rare instances that they cover a story that involves our industry, it generally focuses on growth and the size of the market. This was not the case recently, when a one of the more unexpected non-merger and acquisition related stories was published. The story that captured the news was one that took many of us in the industry by surprise. The central players in the story, Microsoft and Claria, aren’t new. Both have been in the news frequently, and both have also received their share of negative press. That alone might make each hesitant to work with other, which only helps explain the surprise when publications of all types carried the story that Microsoft was considering purchasing Claria.

Outside of our space, Microsoft dominates much of the conversation, but inside the space, it is Claria that receives the lion’s share of the attention. Formerly known as Gator, Claria has a long and not always lustrous reputation in the world of internet advertising. The negatives come from their being one of the earlier purveyors of adware and generally on the slightly aggressive side of the marketing divide. That is to say they grew their business by following the adage that it is easier to ask forgiveness than permission. To their credit, besides being the first major player in the space, they have continually ranked among the best. They have the largest user base, the highest revenue per subscriber, largest advertiser base, best distribution, and the most money. In addition, they have used their profits to build a more tenable business for continued growth and expansion. They were the first of the major adware makers to modify their download process to increase visibility of their terms and conditions. They were the first to start to reposition themselves as an ad network as opposed to the bane of consumers and other websites’ existence. They were also the first to assemble an all-star privacy team including the former Chief Privacy Officer of Microsoft. And just recently, Claria even terminated arguably its largest and most profitable distribution source, Kazaa.

On the surface, Microsoft, in and Claria don’t appear to share much in common. The reaction most people give is why put two companies who have more vocal enemies than friends together. MSN is a combination between Google and Yahoo, part pure search engine and part content driven destination site. Claria on the other hand shows ads. And yet that is precisely why Microsoft has an interest. Claria doesn’t just show ads, they focus on showing relevant ads. Microsoft has no expertise in showing relevant ads. Additionally, they have no expertise in mining user behavior to determine relevancy, both of which are key competencies either possessed by or gaining momentum at Microsoft’s chief rivals, Google and Yahoo.

What separates Microsoft from its rivals is not just technology or a lack of it. Many companies have great technology. Google not only has great technology but they make sure it solves a relevant problem. Like Google, Yahoo combines technology and market awareness into a machine that earns billions yearly not off of licensing but ad sales. Microsoft’s core competencies lie in software sales and licensing. It is no surprise that it has yet to do what Google and Yahoo have thus far done very well. It also helps explain why Microsoft has yet to gain significant share from Google or Yahoo. And organic efforts alone are not likely to help close the gap in the time frame they desire.

With Yahoo pushing into behavioral targeting and social based searches, Microsoft looks to slip even further behind. Fortunately for them, they do have access to an incredible cash reserve and the willingness to use it in order to speed up their learning curve. While not obvious at first, Claria possesses several of the assets that could help Microsoft keep up or even gain ground. Chief among them is Claria’s tracking, targeting, and experience making sense of their invaluable data. For Microsoft to get ahead in search, they can’t afford to simply index the web. They need to push ahead and make sense of the web in a manner that current methodologies make difficult and time consuming. From a monetization standpoint, relevancy means not just the appropriate content but ads. Additionally behavioral targeting, not contextual targeting is viewed to provide results more closely aligned with users’ and advertisers’ needs.

With Claria laying the foundation towards their being a broad player in the internet marketing sector, they have opened up the possibility of a company such as Microsoft even having an interest in their business. It stands to reason that much of their broad strategy has been this exact gamble, i.e. the long process of repositioning themselves to appear more palatable to the public and private markets. Microsoft also stands to benefit. They could get Claria at a favorable point. Claria, while highly profitable, has yet to fully morph into the company people will receive openly. Their strategy of growing into an ad network is an ingenious but untested one. Were they successful in that transformation, Claria might not consider a sale or be priced outside of what Microsoft wants to spend. Microsoft is not a media company, but their rivals have become one, and among the major media players they stand the most to gain from the acquisition of a Claira. Certainly, Microsoft has weathered far worse publicity storms than the one that might erupt were this transaction to be announced. Let’s not forget that while Claria has access to 65 million desktops, Microsoft has access to billions. What would stop them from being Claria’s next big bundle partner, especially if they are one in the same. All of the sudden, the loss of Kazaa doesn’t seem so bad.